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Analysis: What's in Kim Jong Il's wallet?

This week's North Korean currency revaluation is aimed at restoring the state economic sector.

North Korean leader Kim Jong-il inspects a cotton plant farm of the Korean People's Army's 1596 unit in an undisclosed place in North Korea in this picture released by North Korea's official KCNA news agency, Nov. 29, 2009. KCNA did not give the date when the picture was taken. (KCNA/Reuters)

ATLANTA — North Korea’s reported surprise move this week to all but wipe out middle-class savings via a currency revaluation scheme is aimed at forcing millions of people who had grown dependent on private markets to return to jobs in the comatose state economic sector. Don’t bet on instant success because there’s not a lot to go back to.

South Korean news organizations initially said the North’s communist government set a limit of 100,000 won — $35-40 at the unofficial exchange rate — on the amount of old currency that a household could exchange for new bills at the rate of 100 to one. As the week progressed and authorities encountered popular anger they reportedly eased up on the limit, but only slightly.

“The purpose of the currency revaluation is to crush private commercial activities, considered to promote anti-socialism,” reported the South Korean humanitarian aid organization Good Friends.

The government has tied the revaluation to an incentive payment of 500 new won each for citizens who report to work at state jobs, according to Good Friends, which says it relies for much of its news on being in touch by cell phone and otherwise with people inside North Korea. The two moves combined show that the pendulum continues to swing away from measures announced in 2002 that encouraged profit-making and that seemed to give an official stamp of approval to previously illegal private markets the North Koreans had embraced of necessity during a 1990s famine.

The regime stopped issuing new pro-market measures in 2003. By 2007, with private market dealings expanding rapidly and producing a new class of entrepreneurs seen as posing a long-term threat to the power of the regime, the government began cracking down on the almost entirely female-run markets. Younger women were forbidden to work in them and were urged to return to state jobs.

Even for a totalitarian regime long accustomed to total obedience, restoring the old socialist economy is a daunting mission. Defectors say the state sector rotted to the extent that employees began routinely paying their bosses for the privilege of staying away and doing private sector side jobs.

One of those employees was Lee Kwang Soo, who defected to South Korea in 2006 after working as a consultant to state-owned enterprises in the east coast port city of Wonsan. It was a municipal civil service job in which his task was to help the public enterprises survive and become profitable.

“From 2000 I traveled around the country,” Lee told me when we met in Seoul. “I found that the economy was 80 percent dead or paralyzed. If North Korea can get outside aid to demolish everything and make a fresh start, maybe there’s hope. But otherwise I’d say there’s no hope.” More recent defectors likewise voice pessimism on this point.

North Korea had given the appearance of prosperity in the 1960s and ‘70s, even up into the ‘80s, but much of its apparent success came thanks to extensive aid and concessionary trade from fellow communist countries.

Communism collapsed in much of the rest of the world and by the mid-1990s, with North Korea’s former fraternal backers transformed into capitalist or proto-capitalist economies, the country faced extreme shortages in food, energy, transport and industrial raw materials.

Famine killed, by some estimates, millions of North Koreans. As the economy collapsed and people left the workplace to scavenge for food, factories went quiet. Typically, desperate workers, managers or outsiders cannibalized the factory machinery — and even the copper wiring of the country’s electrical grid — and sold them for scrap to Chinese traders.

After the economy hit bottom around 1998 the regime looked for ways to get it moving. One idea was “logistic exchange,” started in 2004. Working for the economic consulting committee in Wonsan city hall, Lee drew the assignment of trying to make deals with enterprises elsewhere to obtain materials needed by local producers.

“It was a non-money barter system,'' Lee said. “The intent was good but the outcome was not so great. It was like trying to plow parched land, a last resort.''

Inability to get materials was not the end of the state enterprises' troubles. Lee gave the hypothetical example of a soap factory. “In the old days the government would set a quota. The factory was told to produce, say, 10,000 bars a month.'' That system changed in the early years of this decade, when enterprises were ordered to concentrate not on production quotas but on profits — of which the regime was to receive a cut.

Such half-hearted nods to the market economy failed to stimulate an increase in production of state-owned enterprises' designated products, Lee said.

Even if a factory had equipment, somehow managed to obtain raw materials and achieved high output, “there was no one to buy the output,'' Lee said. “It's not because people didn't have money. It's a matter of quality.'' Whether it's soap or one of many other products, “there's a lot available in the markets — a bit more expensive but of much higher quality.''

http://www.globalpost.com/dispatch/worldview/091204/north-korea-economy